Upgrading, Degrading, and Intertemporal Price Discrimination

Abstract

The paper studies monopoly pricing of a vertically differentiated durable good in a two-period model. It provides an explanation for seemingly unusual practice of a firm selling a "degraded good," arguing that the presence of Coasian dynamics may lead to the sale of the degraded good that is not less costly to produce than a high-quality good. The main finding is that when the firm can identify previous customers only if they voluntarily reveal their past purchases, it sells the degraded good along with the high-quality good in the first period. When the firm sells an upgrade of the degraded good, the price of the high-quality good cannot be "too low" in the second period, since otherwise the upgrading customers would pretend to be new customers. Thus the firm can enhance first-period sales while mitigating consumers' incentive to wait until the next period.